The Bank of Cyprus is opening a UK-based subsidiary to ensure savers' deposits
are protected by the Financial Services Compensation Scheme.

The move, which has been approved by the UK regulators, is not expected to take place until mid-July though. Until then, the bank, which has more than 50,000 savers, will continue to offer protection via the Cypriot Deposit Protection Scheme – this effectively guarantees up to €100,000 (around £80,000 at current exchange rates) in the event of the bank going bust.

The deepening of the euro crisis has thrown into sharp relief again the security of bank deposits. There have been concerns that the Spanish government could be forced to seek international help to bail out its stricken banks, while some commentators have dubbed Cyprus "the Iceland of the South" because its banking system has been weakened by heavy exposure to Greek debts.

Many European banks run savings and banking arms in the UK. Most of these are fully covered by the Financial Services Compensation Scheme (FSCS), which means that if the bank in question goes under, savers can reclaim a maximum of £85,000 from this Government-backed protection scheme.

For example, Santander, the Spanish bank that bought out Abbey, Alliance & Leicester and the savings arm of Bradford & Bingley, has a UK subsidiary, with its own banking licence. This means it is fully covered by the FSCS, so it offers the same protection as other high street banks.

However, a handful of European banks still run what is known as a "passport" arrangement, meaning that if the bank went bust, UK customers would have to apply to the protection scheme based in the bank's home country.

There are a number of disadvantages with this. For starters, if the pound strengthens against the euro – as it has done in recent weeks – those with savings in sterling, but protected by a euro-denominated scheme could lose out. Following the collapse of the Icelandic banks, almost four years ago, the various European deposit schemes were strengthened and harmonised. The UK scheme increased its protection to £85,000 while the European schemes covers €100,000. But changes to the euro/ sterling exchange rate could diminish the amount protection for UK savers.

The more significant drawback is that should UK savers might find themselves at the back of queue, for refunds should the bank collapse. It seems likely that any Government trying to deal with the economic and political ramifications of one of its major banks going bust, is likely to prioritise its own citizens first.

It's also worth remembering that none of these "protection" schemes, including the UK one, are fully funded, but rely on the Government stepping in to honour these promises. It is not clear whether countries that are already in dire financial straits would be able to meet these guarantees in full. The only recent precedent is Iceland, where the government was unable to refund UK savers promptly after Icesave (part of the Landsbanki) and Kaupthing Singer went bust.

Following the collapse of these Icelandic banks, UK savers have been more reluctant to deposit their money with banks that don't have FSCS cover.

As a result many European banks, like Allied Irish Bank, have opened UK-based subsidiaries that are fully regulated by the Financial Services Authority, and so offer FSCS protection.

There are now just three banks operating these passport arrangements, according to Moneyfacts, the financial information provider. These are ING Direct and Triodos Bank, both of which are protected by the Dutch compensation schemes, and Marfin Laiki Bank, which is covered by the Cypriot scheme. (As stated above both schemes offer protection of up to €100,000.)

It is worth remembering that any bank based outside the EU is not allowed to operate a passport system, and has to be regulated by the FSA and offer full FSCS protection. This means that those with savings in Bank of China, FirstSave (owned by the Bank of Nigeria) Icici Bank (based in India), the Islamic Bank of Britain (part of Qatar International Islamic Bank) and US-based banks such as Citibank have the same protection as those whose money is with Barclays, Lloyds Banking Group or Nationwide Building Society, for example.